Brazil’s Swap Rates Rise as Inflation Accelerates; Real Climbs

Brazil’s swap rates rose the most in
six months, reversing yesterday’s plunge, as inflation
unexpectedly accelerated and central bank President Alexandre
Tombini reiterated that policy makers will keep borrowing costs
stable for a prolonged period.

Swap rates on contracts due in January 2014 climbed 13
basis points, or 0.13 percentage point, to 7 percent at the
close in Sao Paulo, the biggest increase since June. They
dropped 23 basis points yesterday, the most since May. The real
gained for a fifth straight day, appreciating 0.1 percent to
2.0751 per U.S. dollar. It rallied 2.9 percent this week, the
most since Jan. 13.

“The inflation indicator was surprising, much higher than
expected,” Newton Rosa, the chief economist at SulAmerica
Investimentos in Sao Paulo, said in a phone interview. “And
Tombini said GDP growth hasn’t changed policy makers’ evaluation
and rates will stay stable.”

Swap rates fell yesterday the most in seven months as Itau
Unibanco Holding SA (ITUB4) forecast the central bank will resume
cutting borrowing costs next year to bolster an economy that
grew at half the pace analysts surveyed by Bloomberg had
projected. The real posted its biggest five-day gain since
January as Brazil removed capital controls this week that curbed
appreciation and the central bank intervened following the
currency’s drop on Nov. 30 to a three-year low.

Tombini View

Tombini told reporters in Brasilia last night that keeping
monetary conditions stable for a “sufficiently prolonged
period” is the best way to ensure inflation slows to the 4.5
percent midpoint of the central bank’s target range, repeating
language in the statement following its Nov. 27-28 meeting.

Policy makers left the target lending rate at a record low
7.25 percent last month, ending 5.25 percentage points of cuts
since August 2011. Traders use interest-rate swaps to bet on the
direction of borrowing costs.

Annual inflation as measured by the IPCA index of consumer
prices accelerated to 5.53 percent in November from 5.45 percent
in the previous month, the national statistics agency reported
today. The median forecast of 26 economists surveyed by
Bloomberg was for a 5.42 percent pace.

Latin America’s largest economy grew 0.9 percent in the
third quarter from a year earlier, less than half the 1.9
percent median forecast of economists surveyed by Bloomberg, the
statistics agency said last week.

President Dilma Rousseff told reporters in Brasilia today
that she won’t be influenced by The Economist magazine’s call
for her to oust Finance Minister Guido Mantega following the
report on the economy.

Inflation Outlook

Enestor Dos Santos, an economist at BBVA, wrote in an e-
mailed report today that he raised his year-end inflation
forecast to 5.5 percent from 5.4 percent and expects a 5 percent
to 6 percent pace of increases for 2013 and 2014.

“Inflation pressures will be fueled by the tone of fiscal
and monetary policies, the unwillingness to accept a sharper
appreciation of the currency and by a more robust domestic
demand,” Dos Santos wrote.

The real was the best performer this week among the
dollar’s 16 most-traded counterparts tracked by Bloomberg as the
central bank intervened and Brazil reduced the maturity of
foreign loans subject to a 6 percent tax.

The central bank sold $2.1 billion in currency swaps Dec. 3
and $1.6 billion on Nov. 23 to stem the real’s declines. From
August through October, the bank sold reverse currency swaps to
keep the real weaker than 2 per dollar.

Policy makers have swung in 2012 between selling currency
swaps aimed at preventing the real from depreciating too quickly
and offering reverse currency swaps to protect exporters by
keeping the real from strengthening.

The real has still lost 10 percent this year, the most
among major currencies tracked by Bloomberg. It tumbled 4.9
percent in November.